Item 1A. Risk Factors.
Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occur, our business and financial performance could be adversely affected, our actual results could differ materially from our expectations, and our stock price could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may adversely affect our business and financial performance. Before making an investment decision, you should carefully consider the risks described below and all other information included in this report, including our financial statements and related notes. The statements in this report that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occur, our business, financial condition, or results of operations could be harmed. In that case, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment.
Risks Related to Our Company
There is substantial doubt about our ability to continue as a going concern.
We have incurred substantial operating losses since our inception. As reflected in the consolidated financial statements, we had an accumulated deficit of approximately $191.4 million at December 31, 2023 a net loss of approximately $46.4 million, and approximately $5.1 million of net cash used in operating activities for the year ended December 31, 2023. The accompanying consolidated financial statements in this Annual Report on Form 10-K have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As such, we believe that we will need additional financing to fund our operations and develop and commercialize our technology. Also, we will seek to obtain additional capital through debt or sale of equity financing or other arrangements to fund operations; however, there can be no assurance that we will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing stockholders, and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Issued debt securities may contain covenants and limit our ability to pay dividends or make other distributions to stockholders. If we cannot obtain such additional financing, future operations will need to be scaled back or . Due to these factors, management believes that there is substantial in our ability to continue as a going for the twelve months from the issuance of these consolidated financial statements.
We will require additional capital in order to achieve commercial success and , if necessary , to finance future losses from operations as we endeavor to build revenue , but we do not have any commitments to obtain such capital and we cannot assure you that we will be able to obtain adequate capital as and when required .
We may not be able to generate any profit in the foreseeable future. For the year ended December 31, 2023, we reported a net loss of $46.4 million, compared to a net loss of $39.3 million for the year ended December 31, 2022. Accordingly, there is no assurance that we will realize profits in fiscal 2024 or thereafter. If we fail to generate profits from our operations, we will not be able to sustain our business. We may never report profitable operations or generate sufficient revenue to maintain our Company as a going concern. We continue to control our cash expenses as a percentage of expected revenue on an annual basis and thus may use our cash balances in the short term to invest in revenue growth; however, we cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations. Future business demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot assure you that we will be to raise additional capital on acceptable terms or at all. Our to generate profits could have an effect on our financial condition, results of operations, and cash flows. See “ Management’s Discussion and Analysis of Financial Condition and Results of Operations; Liquidity and Capital Resources .”
We have limited management and staff and will be dependent upon partnering arrangements .
As of December 31, 2023, we have eight (8) independent contractors and consultants. Our dependence on third-party consultants and service providers creates a number of risks, including but not limited to, the possibility that such third parties may not be available to us as and when needed, and that we may not be able to properly control the timing and quality of work conducted with respect to our projects. If we experience significant delays in obtaining the services of such third parties or poor performance by such parties, our results of operations and stock price will be materially adversely affected.
The loss of any of our executive officers could adversely affect us .
We currently only have four (4) executive officers. We depend on our executive officers’ extensive experience to implement our acquisition and growth strategy, specifically, Michael Panosian, our President and Chief Executive Officer, and Joshua Keeler, our Vice President of Research and Development. The loss of the services of any of our executive officers could negatively impact our operations and our ability to implement our strategy. Although we maintain a “key man” life insurance policy only for Michael Panosian, we do not carry any key man life insurance for any of our other employees, and our key man insurance policy for Mr. Panosian is for $2 million and will be insufficient to recover any losses resulting from Mr. Panosian’s death or disability while serving as our President and Chief Executive Officer.
We may be unable to attract the necessary employees or be able to prevent our current employees from leaving us.
To induce valuable employees to remain with us, in addition to salary and cash incentives, we have provided restricted stock and stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management may terminate their employment with us. Our success also depends on our ability to continue to attract, retain, and motivate employees.
If the hosts of third-party marketplaces limit our access to such marketplaces , our operations and financial results may be adversely affected .
Third-party marketplaces account for a portion of our revenues. Our sales through online third-party marketplaces represented a combined 15% of total sales for the fourth quarter ended December 31, 2023. We anticipate that sales of our products on third-party marketplaces will continue to account for a portion of our revenues. In the future, the loss of access to these third-party marketplaces, or any significant cost increases from operating on the marketplaces, could significantly reduce our revenues, and the success of our business depends partly on continued access to these third-party marketplaces. Our relationships with our third-party marketplace providers could deteriorate due to various factors, such as if they become concerned about our ability to deliver quality products on a timely basis or to protect a third party’s intellectual property. In addition, third-party marketplace providers could prohibit our access to these marketplaces if we are not able to meet the applicable required terms of use. Loss of access to a marketplace channel could result in lower sales, and as a result, our business and financial results may suffer.
We are highly dependent upon manufacturers in China , India, and Philippines, and an interruption in such relationships or our ability to obtain products from them could adversely affect our business and results of operations .
Our products are manufactured by factories in China, India, and Philippines. Our ability to acquire products from our suppliers in amounts and on terms acceptable to us depends on a number of unforeseeable factors and may be beyond our control. For example, financial or operational difficulties that some of our manufacturers may face could result in an increase in the cost of the products we purchase from them. If we do not maintain our relationships with our existing manufacturers or fail to find replacement or additional manufacturers in a timely manner and on acceptable commercial terms, we may not be able to continue to offer our products at competitive prices and any failure to deliver those products to our customers in a timely and accurate manner may damage our reputation and brand and could cause us to lose customers and our sales could decline.
Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business .
A disruption within our logistics or supply chain network could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs or damage to our reputation. Such disruptions may result from damage or destruction to our distribution centers, weather-related events, natural disasters, international trade disputes or trade policy changes or restrictions, tariffs or import-related taxes, third-party strikes, lock-outs, work stoppages or slowdowns, shortages of supply chain labor, shipping capacity, third-party contract disputes, supply or shipping interruptions or costs, military , acts of terrorism, public health issues, including pandemics or quarantines (such as the COVID-19 pandemic) and related , re-openings or other actions by the government, civil or other factors beyond our control. In recent years, U.S. ports, particularly those located on the West Coast, have been impacted by capacity constraints, port congestion and , periodic labor , security issues, weather-related events, and natural , which the pandemic has further . to our supply chain due to any of the above factors could impact our financial performance or condition.
In addition, a significant percentage of our product production, downstream processing, and sales occur outside the United States or with vendors, suppliers, or customers located outside the United States. If the United States places tariffs or other restrictions on foreign imports from China, India, the Philippines, or other countries, or any related counter-measures are taken, our business, financial condition, results of operations, and growth prospects may be harmed. Tariffs may increase our cost of goods, which could result in lower gross margins on certain of our products. If we raise prices to account for any such increase in costs of goods, the competitiveness of the affected products could potentially be reduced. In either case, increased tariffs on imports from China, India, Philippines, or other countries could materially and adversely affect our business, financial condition and results of operations. Trade restrictions and sanctions implemented by the United States or other countries, including sanctions imposed on Russia by the United States and other countries due to Russia’s recent invasion of Ukraine, could materially and adversely affect our business, financial condition, and results of operations.
We are highly dependent upon manufacturers in China, India, and Philippines , which exposes us to complex regulatory regimes and logistical challenges .
We acquire majority of our products from manufacturers and distributors located in China, India, and Philippines. We do not have any long-term contracts or exclusive agreements with our foreign suppliers that would ensure our ability to acquire the types and quantities of products we desire at acceptable prices and in a timely manner or that would allow us to rely on customary indemnification protection with respect to any third-party claims similar to some of our U.S. suppliers. In addition, because many of our suppliers are outside of the United States, additional factors could interrupt our relationships or affect our ability to acquire the necessary products on acceptable terms, including:
political, social, and economic instability and the risk of war or other international incidents in China, India or the Philippines;
fluctuations in foreign currency exchange rates that may increase our cost of products;
the imposition of duties, taxes, tariffs, or other charges on imports;
difficulties in complying with import and export laws, regulatory requirements, and restrictions;
natural disasters and public health emergencies, such as the recent outbreak of a novel strain of coronavirus identified first in Wuhan, Hubei Province, China, and having turned into a global pandemic that has impacted a number of countries from which we purchase products;
import shipping delays resulting from foreign or domestic labor shortages, slowdowns, or stoppage;
the failure of local laws to provide a sufficient degree of protection against infringement of our intellectual property;
imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S. from countries or regions where we do business;
financial or political instability in any of the countries in which our product is manufactured;
potential recalls or cancellations of orders for any product that does not meet our quality standards;
disruption of imports by labor disputes or strikes and local business practices;
political or military conflict involving the U.S. or any country in which our suppliers are located, which could cause a delay in the transportation of our products, an increase in transportation costs and additional risk to product being damaged and delivered on time;
heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods;
inability of our non-U.S. suppliers to obtain adequate credit or access liquidity to finance their operations; and
our ability to enforce any agreements with our foreign suppliers.
If we were unable to import products from China, India, and Philippines or import them cost-effectively, we could suffer irreparable harm to our business and be required to significantly curtail our operations, file for bankruptcy, or cease operations.
From time to time, we may also have to resort to administrative and court proceedings to enforce our legal rights with foreign suppliers. However, it may be more challenging to evaluate the level of legal protection we enjoy in China, India, and Philippines and the corresponding outcome of any administrative or court proceedings than in comparison to our suppliers in the United States.
Increasing commodity prices such as fuel , plastic, and metal could negatively impact our profit margins .
Prices of certain commodity products, including raw materials, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, trade restrictions, and tariffs. Increasing prices in the component materials for the parts of our goods may impact the availability, the quality and the price of our products, as suppliers search for alternatives to existing materials and increase the prices they charge. We cannot ensure that we can recover all the increased costs through price increases, and our suppliers may not continue to provide consistent quality products as they may substitute lower-cost materials to maintain pricing levels, all of which may have a negative impact on our business and results of operations. Our cost base also reflects significant elements for freight, including fuel. Rapid and significant changes in commodity prices such as fuel, plastic, and metal may negatively affect our profit margins.
Our results of operations could be negatively impacted by inflationary or deflationary economic conditions, which could affect our ability to obtain goods from our suppliers in a timely and cost-effective manner.
Our profitability may be negatively impacted if we are unable to mitigate any inflationary increases through various customer pricing actions and cost-reduction initiatives. Conversely, in the event there is deflation, we may experience pressure from our customers to reduce prices, and there can be no assurance that we would be able to reduce our cost base (through negotiations with suppliers or other measures) to offset any such price concessions which could adversely impact results of operations and cash flows.
We currently, and may in the future, have assets held at financial institutions that may exceed the insurance coverage offered by the Federal Deposit Insurance Corporation (“FDIC”), the loss of such assets would have a severe negative effect on our operations and liquidity.
We may maintain our cash assets at certain financial institutions in the U.S. in amounts that may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000. In the event of a failure of any financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect on our liquidity, financial condition, and our results of operations.
If we are unable to manage the challenges associated with our international operations , the growth of our business could be limited and our business could suffer .
We maintain international business operations throughout Europe with a majority being in the United Kingdom. Our international operations include sales and back-office support services for our European market. We are subject to a number of risks and challenges that specifically relate to our international operations. Our international operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our business and operating results. These risks and challenges include:
difficulties and costs of staffing and managing foreign operations, including any impairment to our relationship with employees caused by a reduction in force;
restrictions imposed by local labor practices and laws on our business and operations;
exposure to different business practices and legal standards;
unexpected changes in regulatory requirements;
the imposition of government controls and restrictions;
political, social and economic instability and the risk of war, terrorist activities or other international incidents;
the failure of telecommunications and connectivity infrastructure;
natural disasters and public health emergencies;
potentially adverse tax consequences; and
fluctuations in foreign currency exchange rates and relative weakness in the U.S. dollar.
If we fail to offer a broad selection of products at competitive prices or maintain sufficient inventory to meet customer demands , our revenue could decline .
In order to expand our business, we must successfully offer, on a continuous basis, a broad selection of products that meet the needs of our customers, including being the first to market with new SKUs. Consumers use our products for a variety of purposes, including repair, performance, aesthetics, and functionality. In addition, to be successful, our product offerings must be broad and deep in scope, competitively priced, well-made, innovative and attractive to a wide range of consumers. We cannot predict with certainty that we will successfully offer products that meet all these requirements. If our product offerings fail to satisfy our customers’ requirements or respond to changes in customer preferences or we otherwise fail to maintain sufficient in-stock inventory, our revenue could decline.
As a result of our international operations , we have foreign exchange risk .
Our purchases of products from our China, India, and the Philippines suppliers are denominated in U.S. dollars; however, a change in the foreign currency exchange rates could impact our product costs over time. Our financial reporting currency is the U.S. dollar and changes in exchange rates due to functional currencies of respective countries could significantly affect our reported results and consolidated trends. For example, if the U.S. dollar weakens year-over-year relative to currencies in our international locations, our consolidated gross profit and operating expenses would be higher than if currencies had remained constant.
Our products could be recalled .
The Consumer Product Safety Commission or other applicable regulatory bodies may require the recall, repair, or replacement of our products if they are found not to be in compliance with applicable standards or regulations. A recall could increase costs and adversely impact our reputation, thereby negatively impacting our financial condition, results of operations, and cash flows.
Regulatory and Litigation Risks
Product liability claims and other kinds of litigation could affect our business , reputation , financial condition , results of operations and cash flows .
The products we design and/or have manufactured can lead to product liability or other legal claims being filed against us. In the past, and may in the future, we have been subject to legal proceedings other than those relating to product liability claims. To the extent that plaintiffs are successful in showing that a defect in a product’s design, manufacture or warnings led to personal injury or property damage, or that our provision of services resulted in similar injury or damage, we may be subject to claims for damages. Although we are insured for damages above a certain amount, we bear the costs and expenses associated with defending , including lawsuits, and are responsible for below the insurance retention amount. In addition to concerning individual products, as a manufacturer, we can be subject to costs, potential publicity, and lawsuits related to product , which could impact our results and our reputation.
Even defending against unsuccessful claims could cause us to incur significant expenses and divert management’s attention. In addition, even if the money damages themselves did not cause substantial harm to our business, the damage to our reputation and the brands offered on our websites could adversely affect our future reputation and our brand, and could result in a decline in our net sales and profitability.
Failure to comply with privacy laws and regulations and adequately protect customer data could harm our business, damage our reputation, and result in a loss of customers .
Federal and state regulations may govern the collection, use, sharing, and security of data that we receive from our customers. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, U.S. Federal Trade Commission requirements or other federal, state or international privacy-related laws and regulations could result in proceedings or actions against us by governmental entities or others, which could potentially harm our business. Further, failure or perceived failure to comply with our policies or applicable requirements related to the collection, use or security of personal information or other privacy-related matters could damage our reputation and result in a loss of customers.
The regulatory framework for data privacy is constantly evolving , and privacy concerns could adversely affect our operating results .
The regulatory framework for privacy issues is evolving and will likely remain uncertain for the foreseeable future. The occurrence of unanticipated events often rapidly drives the adoption of legislation or regulation affecting the use of data and the way we conduct our business; in fact, there are active discussions among U.S. legislators around adopting a new U.S. federal privacy law. Restrictions could be placed upon the collection, management, aggregation and use of information, which could result in a material increase in the cost of collecting and maintaining certain kinds of data. In June 2018, California enacted the California Consumer Privacy Act, which took effect on January 1, 2020, and in November 2020, California voters approved Proposition 24, which amended the California Consumer Privacy Act and added new additional privacy protections that began on January 1, 2023 (the “C.C.P.A.”). The C.C.P.A. gives consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, the right not to be discriminated against for exercising these rights, the right to correct inaccurate personal information that a business has about them and the right to limit the use and disclosure of sensitive personal information collected about them. We are required to comply with the C.C.P.A. The C.C.P.A. provides for civil for and a private right of action for data that are expected to increase data . The C.C.P.A. may increase our compliance costs and potential liability. Some observers have noted that the C.C.P.A. could begin a trend toward more privacy legislation in the U.S., which could increase our potential liability and affect our business.
If we are unable to protect our intellectual property rights , our reputation and brand could be impaired, and we could lose customers .
We regard our trademarks, trade secrets, and similar intellectual property rights as critical to our success. We rely on trademark and copyright law, trade secret protection, and confidentiality and license agreements with employees, customers, partners, and others to protect our proprietary rights. We cannot be sure that we have taken adequate steps to protect our proprietary rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, our proprietary rights may be infringed or misappropriated, and we could incur significant expenses to preserve them. The outcome of such litigation can be uncertain, and the cost of prosecuting such litigation may adversely impact our earnings. We have common law trademarks, as well as pending federal trademark registrations for several marks and several registered marks. However, any registrations may not adequately cover our intellectual property or protect us against infringement by others. trademarks, service marks, copyrights, patents, and trade secrets protection may not be available in every country where our products and services are available online. We also currently own or control a number of Internet domain names, including www.toughbuilt.com , and have invested time and money in purchasing domain names and other intellectual property, which may be if we cannot protect such intellectual property. We may be to protect these domain names or acquire or maintain relevant domain names in the United States and other countries. If we cannot protect our trademarks, domain names, or other intellectual property, we may experience and maintaining brand recognition and customer loyalty.
If we are unable to protect our intellectual property , our business may be adversely affected .
We must protect the proprietary nature of the intellectual property used in our business. There can be no assurance that trade secrets and other intellectual property will not be challenged, invalidated, misappropriated, or circumvented by third parties. Our intellectual property includes issued patents, patent applications, trademarks, trademark applications, and know-how related to business, product, and technology development. We plan on taking the necessary steps, including but not limited to filing additional patents as appropriate. There is no assurance any additional patents will be issued or that when they are issued, they will include all of the claims currently included in the applications. Even if they do issue, those new patents and our existing patents must be protected against possible infringement. Nonetheless, we currently rely on contractual obligations of our employees and contractors to maintain the confidentiality of our products. To compete effectively, we need to develop and continue to maintain a proprietary position concerning our technologies, and business. The risks and uncertainties that we face concerning intellectual property rights principally include the following:
patent applications that we file may not result in issued patents or may take longer than expected to result in issued patents;
we may be subject to interference proceedings;
other companies may claim that patents applied for by, assigned, or licensed to, us infringe upon their own intellectual property rights;
we may be subject to opposition proceedings in the U.S. and in foreign countries;
any patents that are issued to us may not provide meaningful protection;
we may not be able to develop additional proprietary technologies that are patentable;
other companies may challenge patents licensed or issued to us;
other companies may independently develop similar or alternative technologies, or duplicate our technologies;
other companies may design around technologies that we have licensed or developed;
any patents issued to us may expire and competitors may utilize the technology found in such patents to commercialize their own products; and
enforcement of patents is complex, uncertain, and expensive.
It is also possible that others may obtain issued patents that could prevent us from commercializing certain aspects of our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. If we license patents, our rights will depend on maintaining its obligations to the licensor under the applicable license agreement, and we may be unable to do so. Furthermore, there can be no assurance that the work-for-hire, intellectual property assignment, and confidentiality agreements entered into by our employees and consultants, advisors, and collaborators will provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosure of such trade secrets, know-how or other proprietary information. As all of our products are manufactured in China, India, and the Philippines, we may not have the same strength of intellectual property protection and enforcement in such countries as in North America or Europe. The scope and enforceability of patent claims are not systematically predictable with absolute accuracy. The strength of our patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.
We may not be able to enforce our intellectual property rights worldwide .
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property. If we are unable to enforce our intellectual property rights throughout the world adequately, our business, financial condition, and results of operations could be adversely impacted.
Because we are involved in litigation from time to time and are subject to numerous laws and governmental regulations , we could incur substantial judgments , fines , legal fees, other costs, and reputational harm .
We are sometimes the subject of complaints or litigation from customers, employees, or other third parties for various reasons. The damages sought against us in some of these litigation proceedings could be substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to exceed our insurance coverage limits greatly or if our insurance policies do not cover a claim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business , cash flow , financial condition, or results of operations .
New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us. For example, legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (the “Tax Act”), enacted many significant changes to the U.S. tax laws. Future guidance from the Internal Revenue Service and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. In addition, it is uncertain if and to what extent various states will conform to the Tax Act or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.
Existing or future government regulation could expose us to liabilities and costly changes in our business operations and could reduce customer demand for our products and services .
We are subject to federal and state consumer protection laws and regulations, including laws protecting the privacy of customer nonpublic information and regulations prohibiting unfair and deceptive trade practices, as well as laws and regulations governing businesses in general and the Internet and e-commerce and certain environmental laws. Additional laws and regulations may be adopted with respect to the Internet, the effect of which on e-commerce is uncertain. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing emails and communications, other advertising and promotional practices, money transfers, pricing, content and quality of products and services, taxation, electronic contracts, and other communications, intellectual property rights, and information security. Furthermore, it is unclear how existing laws governing issues such as property ownership, sales and other taxes, trespass, data mining and collection, and personal privacy apply to the Internet and e-commerce. To the extent we expand into international markets, we will be faced with complying with local laws and regulations, some of which may be materially different than U.S. laws and regulations. Any such foreign law or regulation, any new U.S. law or regulation, or the interpretation or application of existing laws and regulations to the Internet or other online services or our business, in general, may have a material adverse effect on our business, prospects, financial condition and results of operations by, among other things, the growth of the Internet, us to , , or other liabilities, requiring changes in our business operations and practices, and reducing customer demand for our products and services. We may not maintain sufficient or any insurance coverage to cover the types of or liabilities that could arise due to such regulations.
Possible new tariffs that the United States government might impose could have a material adverse effect on our results of operations .
Changes in U.S. and foreign governments’ trade policies have resulted in and may continue to result in, tariffs on imports into and exports from the U.S., among other restrictions. Throughout from 2018 to 2023, the U.S. imposed tariffs on imports from several countries, including China. If further tariffs are imposed on imports of our products or retaliatory trade measures are taken by China or other countries in response to existing or future tariffs, we could be forced to raise prices on all of our imported products or make changes to our operations, any of which could materially harm our revenue or operating results. Any additional future tariffs or quotas imposed on our products or related materials may impact our sales, gross margin, and profitability if we are unable to pass increased prices onto our customers.
We operate in an industry with the risk of intellectual property litigation . Claims of infringement against us may hurt our business .
Our success depends, in part, upon the non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures or adverse consequences. Participants that own, or claim to own, intellectual property may aggressively assert their rights. From time to time, we may be subject to legal proceedings and claims relating to the intellectual property rights of others. Future litigation may be necessary to defend us or our clients by determining the scope, enforceability, and validity of third-party proprietary rights or to establish its proprietary rights. Some competitors have substantially greater resources and are able to sustain the costs of complex intellectual property litigation to a degree and for extended time periods. In addition, patent-holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us. Regardless of whether that we are patents or other intellectual property rights have any merit, these are time-consuming and to evaluate and and could:
adversely affect relationships with future clients;
cause delays or stoppages in providing products;
divert management’s attention and resources;
subject us to significant liabilities; and
require us to cease some or all of its activities.
In addition to liability for monetary damages, which may be tripled and may include attorneys’ fees or, in some circumstances, damages against clients, we may be prohibited from developing, commercializing, or continuing to provide some or all of our products unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.
Geopolitical conditions, including trade disputes and direct or indirect acts of war or terrorism, could adversely affect our operations and financial results.
Since we operate globally, our operations could be disrupted by geopolitical conditions, trade disputes, international boycotts and sanctions, political and social instability, acts of war, terrorist activity, or other similar events. From time to time, we could have a significant investment in a particular asset type, a large revenue stream associated with a specific customer or industry, or a large number of customers located in a certain geographic region. Decreased demand from a discrete event impacting a specific asset type, customer, industry, or region in which we have a concentrated exposure could negatively impact our results of operations.
In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus, and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof, as well as any counter-measures or retaliatory actions by Russia or Belarus in response, including, for example, potential cyber-attacks or the disruption of energy exports, is likely to cause regional instability, geopolitical shifts, and could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. The situation remains uncertain, and while it is to predict the impact of any of the preceding, the and actions taken in response to the could increase our costs, our supply chain, reduce our sales and earnings, our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise affect our business, financial condition, and results of operations.
Risks Related to Information Technology
The Company’s lack of formalized cybersecurity measures and protocols exposes it to significant risks that could materially and adversely affect its business operations, financial condition, and reputation. In particular:
Increased Vulnerability to Cyber Attacks : Without robust cybersecurity measures in place, the Company is at an elevated risk of falling victim to cyber-attacks, including, but not limited to, malware, ransomware, phishing, and denial-of-service attacks. Such incidents could disrupt business operations, cause the loss of critical data, and allow unauthorized access to sensitive information.
Data Breach and Loss of Confidential Information : The absence of comprehensive cybersecurity protocols increases the likelihood of a data breach. A breach could result in the loss or theft of proprietary business information, intellectual property, or personal data of employees, customers, and other stakeholders. This could expose the Company to legal liabilities, regulatory fines, and loss of trust among customers and partners.
Financial Impact : Cybersecurity incidents could impose significant financial burdens on the Company, including costs associated with investigation, remediation, legal fees, and potential settlements or penalties arising from litigation and regulatory actions. Additionally, the Company may incur substantial costs to implement remedial measures and enhance its cybersecurity infrastructure post-incident.
Regulatory Compliance Risks : The Company operates in an environment that is increasingly regulated regarding data protection and cybersecurity. Failure to establish and maintain adequate cybersecurity measures could result in non-compliance with applicable laws and regulations, leading to legal penalties, sanctions, and reputational damage.
Reputational Damage : Cybersecurity incidents can significantly damage the Company’s reputation and brand image. A loss of customer confidence could result in decreased demand for the Company’s products and services, affecting its market position and long-term profitability.
Operational Disruptions : Cyber attacks can disrupt the Company’s operational capabilities, impacting its ability to deliver products and services, manage supply chains, and maintain financial reporting systems. Prolonged disruptions could have a material adverse effect on the Company’s operational performance and financial results.
The Company acknowledges the importance of cybersecurity and is evaluating its needs to develop and implement appropriate measures to enhance its cybersecurity posture. However, there can be no assurance that these initiatives will sufficiently mitigate the risks associated with cybersecurity threats. The landscape of cybersecurity risks is constantly evolving, and the Company will need to continuously assess and update its cybersecurity measures in response to emerging threats.
General Risk Factors
An investment in our securities is speculative, and there can be no assurance of a return on such an investment .
An investment in our securities is speculative, and there can be no assurance that investors will obtain any return on their investment. Investors may be subject to substantial risks involved in an investment in our securities, including losing their entire investment.
Certain provisions of our Articles of Incorporation could allow the concentration of voting power in one individual, which may, among other things, delay or frustrate the removal of incumbent directors or a takeover attempt, even if such events may benefit our stockholders .
Provisions of our Articles of Incorporation, such as our ability to designate and issue a class of preferred stock without stockholder approval, may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer, or proxy contest involving our Company that is not approved by our board of directors (“Board”), even if those events may be perceived to be in the best interests of our stockholders. For example, one or more of our affiliates could theoretically be issued a newly authorized and designated class of shares of our preferred stock. Such shares could have significant voting power, which may dilute the voting power of our common stock, among other terms. Consequently, anyone to whom these shares of preferred stock were issued could have sufficient voting power to significantly influence, if not control, the outcome of all corporate matters submitted to the vote of our common stockholders, subject to the rules promulgated by Nasdaq. Those matters could include the election of directors, changes in the size and composition of the Board, and mergers and other business combinations involving our Company. In addition, through any such person’s control of the Board and voting power, the affiliate may be able to control certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), and the acquisition or disposition of assets by our Company. In addition, the concentration of voting power in the hands of an affiliate could have the effect of or a change in control of our Company, even if the change in control would our stockholders and may affect the future market price of our common stock should a trading market therefore develop.
If you purchase shares of our common stock , you may experience immediate and substantial dilution in your shares’ net tangible book value . In addition , we may issue shares of common stock under our equity incentive plans and additional equity or convertible debt securities in the future , which may dilute investors further .
We are currently authorized to issue up to 200,000,000 shares of common stock. In the future, we may issue previously authorized and unissued shares of common stock, which would dilute current stockholders’ ownership interests. Additional shares are subject to issuance through various equity compensation plans or the exercise of currently outstanding equity awards. The potential issuance of additional shares of common stock may create downward pressure on the trading price of our common stock. In the future, we may issue additional shares of common stock or other securities that are convertible into or exercisable for common stock to raise capital or effectuate other business purposes. Purchasers of the shares we sell and our existing stockholders will experience significant dilution if we sell shares at prices significantly below the price at which they invested. In addition, to the extent we need to raise additional capital in the future and we issue additional shares of common stock or securities convertible or exchangeable for our common stock, our then existing stockholders may experience dilution, and the new securities may have rights senior to those of our common stock offered in this offering. Any of the above events could significantly harm our business, prospects, financial condition and results of operations, as well as cause the price of our common stock to decline.
Our stock price has been and may continue to be volatile.
The market price of our common stock has been and may continue to be subject to material volatility. Such fluctuations could be in response to, among other things, the factors described in this “ Risk Factors ” section or other factors, some of which are beyond our control, such as:
the ongoing impacts of the COVID-19 pandemic and the resulting impact on stock market performance;
fluctuations in our financial results or outlook or those of companies perceived to be similar to us;
changes in the prices of commodities associated with our business;
changes in our capital structure, such as future issuances of securities or the incurrence of debt;
announcements by us or our competitors of significant contracts, acquisitions, or strategic partnerships;
regulatory developments;
litigation involving us or our general industry;
additions or departures of key personnel; and
changes in general economic, industry, and market conditions.
In the past, many companies that have experienced volatility and sustained declines in the market price of their stock have become subject to securities class action and derivative action litigation. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could materially harm our business. Any insurance we maintain may not provide adequate coverage against potential losses from such securities litigation, and if claims or losses exceed our liability insurance coverage, our business would be adversely impacted. In addition, insurance coverage may become more expensive, which could harm our financial condition and results of operations.
Other international and geopolitical events could also have a severe adverse impact on our business. For instance, in February 2022, Russia initiated military action against Ukraine. In October 2023, Israel initiated a military action against and Hamas in Gaza. In response, the United States and certain other countries imposed significant sanctions and trade actions against Russia and could impose further sanctions, trade restrictions, and other retaliatory actions. While we cannot predict the broader consequences, the conflict, and retaliatory and counter-retaliatory actions could materially adversely affect global trade, currency exchange rates, inflation, regional economies, and the global economy, which in turn may increase our costs, disrupt our supply chain, impair our ability to raise or access additional capital when needed on acceptable terms, if at all, or otherwise affect our business, financial condition, and results of operations.
We may need but be unable to obtain additional funding on satisfactory terms, which could dilute our stockholders or impose burdensome financial restrictions on our business.
We have relied upon cash from financing activities, and in the future, we hope to rely on revenues generated from operations to fund our activities’ cash requirements. However, there can be no assurance that we will be able to generate any significant cash from our operating activities in the future. Future financing may not be available on a timely basis, in sufficient amounts, or on terms acceptable to us, if at all. Any debt financing or other financing of securities senior to the common stock will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, and results of operations because we could lose our existing funding sources and impair our ability to secure new funding sources.
Being a public company is expensive and administratively burdensome.
As a public reporting company, we are subject to the information and reporting requirements of the Securities Act, the Exchange Act, and other federal securities laws, rules, and regulations related thereto, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Complying with these laws and regulations requires the time and attention of our Board and management and increases our expenses. Among other things, we are required to:
maintain and evaluate a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
maintain policies relating to disclosure controls and procedures;
prepare and distribute periodic reports in compliance with our obligations under federal securities laws;
institute a more comprehensive compliance function, including with respect to corporate governance; and
involve, to a greater degree, our outside legal counsel and accountants in the above activities.
The costs of preparing and filing annual and quarterly reports, proxy statements, when required, and other information with the SEC and furnishing audited reports to stockholders is expensive and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire additional financial reporting, internal controls, and other finance personnel, and involve a material increase in regulatory, legal and accounting expenses and the attention of management. There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. In addition, being a public company makes it more expensive for us to obtain director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage.
Additionally, the expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. These increased costs will require us to divert a significant amount of money that we could otherwise use to develop our business. If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, and other regulatory action, as well as potentially civil litigation.
We have identified material weaknesses in our internal control over financial reporting. These material weaknesses could continue to adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management is likewise required, every quarter, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, so there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As described in this Annual Report on Form 10-K, we identified several material weaknesses in our internal control over financial reporting. As a result, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023.
Any failure to maintain such internal control could adversely impact on our ability to report our financial position and results from operations on a timely and accurate basis, which could result in a material adverse effect on our business. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Since our financial statements are not filed on time, we are subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. In addition, we would likely incur additional accounting, legal, and other costs in connection with any remediation steps. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could negatively affect our stock’s trading price.
To respond to these material weaknesses, we have devoted significant efforts and resources committed to the remediation and improvement of our internal control over financial reporting. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance these processes to evaluate our research better and understand the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include investing in information technology (“IT”) systems to enhance our operational and financial reporting and internal controls, enhancing our organizational structure to support financial reporting processes and internal controls, further developing and documenting detailed policies and procedures regarding business processes for significant accounts, critical accounting policies and critical accounting estimates, establishing effective general controls over IT systems to ensure that information produced can be relied upon by process level controls is relevant and reliable, providing guidance, education and training to employees relating to our accounting policies and procedures. Additionally, we have hired and plan to continue to hire, as resources permit, qualified accounting personnel to manage our functional controls and segregate responsibilities. The elements of our remediation plan can only be over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
We can give no assurance that the measures we have taken and plan to take in the future, will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we successfully strengthen our controls and procedures, in the future, those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
New laws , regulations , and standards relating to corporate governance and public disclosure may create uncertainty for public companies , increasing legal and financial compliance costs and making some activities more time-consuming .
These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, may evolve as the courts and other bodies provide new guidance. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing disclosure and governance practice revisions. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
As a public company subject to these rules and regulations, we may find it more expensive to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on its Audit Committee and Compensation Committee, and qualified executive officers.
If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock , our stock price and trading volume could decline .
The trading market for our securities may depend partly on the research and reports that research analysts publish about us and our business. If we do not maintain adequate research coverage, or if any of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, the price of our common stock could decline. If one or more of our research analysts ceases to cover our company or fails to publish reports on us regularly, demand for our securities could decrease, which could cause the price of our common stock and warrants or trading volume to decline.
We do not intend to pay dividends on our common stock in the foreseeable future, and consequently, your ability to achieve a return on your investment will depend on its appreciation .
We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Anti-takeover provisions in our charter documents and Nevada law could discourage, delay or prevent a change of control of our Company and may affect the trading price of our common stock .
We are a Nevada corporation, and the anti-takeover provisions of the Nevada Control Shares Acquisition Act may discourage, delay, or prevent a change of control by limiting the voting rights of control shares acquired in a control share acquisition. In addition, our Articles of Incorporation and the A&R Bylaws may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, our Articles of Incorporation and A&R Bylaws:
authorize the issuance of “blank check” preferred stock that our Board could issue in response to a takeover attempt;
provide that vacancies on our Board, including newly created directorships, may be filled only by a majority vote of directors then in office, except a vacancy occurring because of the removal of a director without cause shall be filled by vote of the stockholders; and
limit who may call special meetings of stockholders.
These provisions could delay or prevent a change of control, whether desired by or beneficial to our stockholders.
The security of our IT systems may be compromised in the event of system failures, unauthorized access, cyber-attacks, or a deficiency in our cybersecurity, and confidential information, including nonpublic personal information that we maintain, could be improperly disclosed.
We rely extensively on IT and systems, including internet sites, data hosting, physical security, and software applications and platforms. Despite our security measures, our IT systems, some of which are managed by third parties, may be susceptible to damage, disruptions, or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, power outages, user errors or catastrophic events. A significant breakdown, invasion, corruption, destruction, or interruption of critical IT systems by our employees, others with authorized access to our systems, or unauthorized persons could negatively impact or operations. Technology, including cloud-based computing, creates for the dissemination or of confidential information stored in our or third-party systems. We could also experience a business , theft of confidential information, or reputational from malware or other cyber-attacks, which may compromise our systems or lead to data leakage, internally or at our third-party providers.
As part of our business, we maintain large amounts of confidential information, including nonpublic personal information on customers and our employees. Breaches in security, either internally or at our third-party providers, could result in the loss or misuse of this information, which could, in turn, result in potential regulatory actions or litigation, including material claims for damages, interruption to our operations, damage to our reputation or otherwise have a material adverse effect on our business, financial condition, and operating results. Although we maintain information security policies and systems designed to prevent unauthorized use or disclosure of confidential information, including nonpublic personal information, there can be no assurance that such use or disclosure will not occur.
Any such business interruption, theft of confidential information, reputational damage from malware or other cyber-attacks, or violation of personal information laws could have a material adverse effect on our business, financial condition, and results of operations.
